What is Capital Budgeting Statistics Project Example | Topics and Well Written Essays - 1000 words

What is Capital Budgeting - Statistics Project Example The NPV for corporation B is also higher than for corporation A. The difference is not very significant at less than 10%, but in the absence of other information, it would appear that corporation B fetches higher present value. The NPV represents today's value of projected future cash flows. The rate of discounting should approximate the bank rate, and the 10% figure given should be seen in this context. The difference in NPV between the two alternatives would be inadequate to support any decision, given that there would inevitably be some uncertainty in the projections of revenue and cost. The IRR is higher for corporation B than for corporation A. Since the company has limited funds to invest and since each of the alternatives requires equal funding, corporation B is a better choice in terms of IRR. IRR is the most relevant measure in this case since the firm has limited funds and has to make a choice between the two corporations available for acquisition. Again, the difference in IRR between the two corporations is too small to support any decision in real life. The Pay-back period is the same for both corporations, so no difference can be made on this account. Both corporations are equal in terms of the payback period. The payback figure is easy to calculate, but it can be misleading. Acquisition of a corporation should consider risks inherent in its projected earnings and continued revenues (Jean-Jacques, 2002, p55). The pay-back figure would not be an important consideration unless a diversification into a highly risky line of business was to be involved. Future cash flows that have not been discounted do not have much value in a business situation. Profitability Profitability is better in the case of corporation A. This could be because corporation B has secured a bigger market share through price competition, and seems to have a policy of cutting margins in order to retain its market position and business volume. It may be a matter for management intervention after an acquisition, for declining margins are most often difficult to reverse and can affect the long-term financial health of an enterprise. Discounted Payback The discounted payback period is one year more than if we consider nominal values of annual cash flows. This is the case with both corporations. This measure is more meaningful than plain pay-back. The effect of discounting is almost the same for both corporations, delaying pay-back by about a year. The discounted pay-back in the fifth year is not particularly attractive.